Key to equity success is investing long term at

all times

To minimize the chances of loss and aim to maximize gains, one has to stay invested for the

very long haul

The domestic stock market has had much to cheer about this past year. Equity assets have

delivered and the S&P BSE Sensex has risen by more than a third. Last year, the stock market

was at attractive valuations, and many sectors were available for reasonable valuations. (Source:

Bloomberg).

Since then, nearly all the sectors in the market have done well. From mid-caps to small-caps,

from domestic cyclicals to even traditional defensive sectors, all have experienced improved

valuations in the past year. The S&P BSE Mid and Small Cap indices have risen 65.6% and

89.7%, respectively, since last year. (Source: BSE India)

While there have been some years in which equities have done well and some years in which

they have not on a fundamental level, equity has proved to be a better asset class over a few

decades. Though, of course, sentiment-driven short-term swings dissuade people from investing

here.

For instance, at this time last year, investors were largely overlooking equity because it seemed

that there was more downside left in markets. But those investors, who took a long-term view

and invested, were rewarded. Nevertheless, at all times, investors should consider equity as a

very long-term asset class and accumulate this whenever a suitable opportunity presents itself.

If you look at the returns of the bellwether index from its 1979 base, the Sensex has seen 17.2%

compounded annual growth—much higher than any other asset class, and a return that also beats

inflation. (BSE India & RBI).

So, if you have decades on your side, and if you are ready to give equity sufficient time, it would

translate to relatively high gains. Time enables companies to reap the benefits of scale by

increasing revenue and profitability. This then translates into rising shareholder value over long

periods.

Investing early and for long periods also allows you to optimize the benefits of compounding. In

fact, the more time you give your investments, the greater they would grow over the years. For

example, a small sum of Rs.1,000 invested every month at 15% per annum increases to a tidy

sum of Rs.69 lakh over 30 years.

Besides, the case for investing in equities for the long haul is getting stronger with the Indian

economy now firmly on a structural growth track. With a much lower current account deficit,

larger forex reserves and upward-looking industrial production figures, the economy could get

better over the coming years. Crude oil and energy prices have trended lower lately and inflation

has dipped below 6%.( Source: RBI & Bloomberg).

At this level, the Reserve Bank of India is likely to draw some comfort in achieving its target of

6% inflation levels by financial year 2016. Hence, there could be a rate cut sooner or later and

that presents a real opportunity to spur credit growth, which can, in turn, boost corporate

earnings.

Therefore, one could see an improvement in profitability over the next few years. Even with the

stock markets at all-time highs now, there is still room to rise further. The factors that

characterize a stock market peak, such as high industrial production and considerably lower

inflation and interest rates, are still some time away.

It also does not matter at what level the market is if you are a long haul investor and keep

investing steadily. Studies have shown that even if you have bought good companies at different

peaks in the market but have held them for decades, stocks have delivered reasonable returns. In

the stock market, you have to be a distance runner rather than a sprinter.

Even now, despite the rising valuations and after factoring in last year’s significant rise in the

market, investors can and should gradually accumulate good equity funds at this point.

In fact, investors should look for and continue in well-managed diversified equity funds that can

straddle different market caps, and those who missed the bus could consider funds with

defensive strategies that have the ability to generate cash by selling at market peaks and buying

more whenever the market is cheap.

Keep in mind that in equity investment, to minimize the chances of loss and aim to maximize

egains, one has to stay invested for a very long haul, and keep accumulating whenever there is an

opportunity. The global markets, too, may see some headwinds and that may present

opportunities to invest in equity funds. But again, picture the long horizon. Patience in equity

markets is rewarding, and the longer one invests and waits, the better can be the rewards.

Nimesh Shah is managing director and chief executive officer, ICICI Prudential Asset

Management Co. Ltd.

This article was published in Mint newspaper on 27th November 2014.